If you are an owner of a corporation and declare a personal bankruptcy, your interest in the company is viewed as property.
When you file for personal bankruptcy, you are required by law to disclose all of your property—including your corporate stock. Furthermore, you must indicate how much the stock is worth by assigning each share a value.
What will happen next depends on the following:
- the type of bankruptcy that you file. You may file a Chapter 7 or a Chapter 13.
- the value of your shares
- whether your state’s exemption laws will allow you to keep them.
Each state allows individuals to keep a certain amount of property. If the property is not required to maintain a employment and a household, the chances of such assets being exempt are slim and corporate shares aren’t assets that most states believe are required for everyday life. However, may be able to utilize a wildcard exemption that permits you to keep a certain amount of property of your choice. In that case, you may use your wildcard exemption to protect your shares in the company.
In the event that you are able to exempt the shares, then the answer to this question is simple— the personal bankruptcy will not affect your corporation. Your ownership interest and corporate participation will remain unchanged.
If you can’t exempt the shares, then it becomes more complicated depending on whether you file a Chapter 7 or a Chapter 13.
Filing for Chapter 7 bankruptcy
A bankruptcy trustee appointed by the Court to oversee your case will sell of assets to pay creditors. If that happens, the corporation will continue to operate t. However, you’ll not retain any ownership/ interest in the company.
For instance, it’s likely that the shares will be purchased if the company will remain functioning without you. However, the situation will be entirely different if you own all or a majority of the shares and the business will completely shut down in your absence. For example, if you’re the only hairdresser in a salon and you aren’t willing to remain as an employee, then it will be unlikely that the trustee will be able to find a buyer. In that case, the corporation would not be worth anything. As such, the trustee will abandon the property (the shares), and you’ll keep your ownership interest.
Filing for Chapter 13 bankruptcy
If you absolutely want to keep your property, then a Chapter 13 is your best case scenario. You’ll be able to hold on to the shares even if they are non-exempt. Instead, you’ll pay your creditors the value of the nonexempt stock over the course of your three- to five-year repayment plan.
If you are thinking about filing bankruptcy and have concerns about how it may affect your business, speak to one of our experienced debt relief lawyers. Your initial consultation is free. Also see: